More Hoops for Borrowers

Federal Housing Administration Commissioner Brian Montgomery has said that the FHA works with
Federal Housing Administration Commissioner Brian Montgomery has said that the FHA works with "30-year, fixed-rate, garden-variety, plain-vanilla" mortgages. (By Carol T. Powers -- Bloomberg News)
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By Dina ElBoghdady
Washington Post Staff Writer
Saturday, December 29, 2007

If you hope to get a mortgage this coming year, look beyond your credit score, because that's what lenders will be doing.

The mortgage mess that has grabbed the attention of politicians, economists and investors has also altered the loan options available to borrowers. Mortgages that require no down payment or no verification of income or assets have fallen out of favor. So have mortgages that exceed $417,000, also known as jumbo loans. It's still possible to find all those types of loans, but count on paying higher rates and jumping through more hoops.

When homes prices were rising, the borrower's credit score was pretty much all that mattered to lenders. Back then, homeowners could quickly build equity. That made it easier for them to sell or refinance their homes if they were strapped for cash, which insulated lenders from defaults. "So the credit score trumped everything," said Keith Gumbinger, a vice president at research firm HSH Associates.

But income matters now, and so does cash, said Sean O'Boyle, a vice president at SunTrust Mortgage in Chevy Chase. Lenders expect borrowers to have several months' worth of mortgage payments in reserve and a steady job.

"Job stability. Credit. Cash," O'Boyle said. "They're all equally important. Not one of them overshadows the other."

Lenders expect borrowers to put money down now, the norm being about 5 percent, said John Ulzheimer, president of consumer education for, a personal-finance Web site.

While a few loans may require just 1 percent to 3 percent down, "lenders in those cases are looking for immediate equity in the property, meaning the appraisal has to come out at or greater than the amount of money being borrowed," Ulzheimer said.

For instance, if a home is appraised at $170,000 and sells for $160,000, the buyer has an instant $10,000 in equity, from the lender's perspective.

The more conservative lending environment has also meant a partial return to traditional underwriting ratios. Those were formulas dictating that your monthly mortgage payment, including taxes and insurance, should not exceed 28 percent of your gross pay, and that all your loans, mortgage included, should not exceed 36 percent.

"I called it hurdle underwriting," said Margie Hoffberg, president of Residential Mortgage Center, a Rockville mortgage brokerage. "The idea was that a third of your check went to taxes, a third to housing and a third would be left for everything else. We'd start with that, and if you could not get past that hurdle, we could not do your loan. It didn't matter what your income or credit score was."

Flexibility at a Price

But some flexibility remains. "There's no hard and fast rules about the ratios," said Jean Marie Pace, a loan officer at FNMC, a division of National City Bank. "If your credit scores are high and your monthly debt is low compared to your income, the ratios matter less. If that's not the case, the ratios matter more."

You can even find loans that require no down payment or no proof of income. Just expect tradeoffs.

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